The tech industry can sometimes be difficult to analyze and compare to other industries, with the result often leading to speculation about where a company will go in the future. One of the greatest lessons from Benjamin Graham is to avoid speculating by basing your analysis on factual data. The tech industry is one of the areas where this lesson should be remembered most dearly. Intelligent Investors seeking to follow Graham's methods should use an analytical method that can be utilized across industries in order to allow the comparison of opportunities for profit. The ModernGraham analysis is intended to compile information in order to compare an investment opportunity against another, and what follows is a specific look at how Cisco Systems, Inc. fares in the ModernGraham valuation model.
CSCO data by YCharts
Defensive Investor - must pass at least 6 of the following 7 tests: Score = 6/7
- Adequate Size of Enterprise - market capitalization of at least $2 billion - PASS
- Sufficiently Strong Financial Condition - current ratio greater than 2 - PASS
- Earnings Stability - positive earnings per share for at least 10 straight years - PASS
- Dividend Record - has paid a dividend for at least 10 straight years - FAIL
- Earnings Growth - earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period - PASS
- Moderate PEmg ratio - PEmg is less than 20 - PASS
- Moderate Price to Assets - PB ratio is less than 2.5 or PB x PEmg is less than 50 - PASS
Enterprising Investor - must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 5/5
- Sufficiently Strong Financial Condition, Part 1 - current ratio greater than 1.5 - PASS
- Sufficiently Strong Financial Condition, Part 2 - Debt to Net Current Assets ratio less than 1.1 - PASS
- Earnings Stability - positive earnings per share for at least 5 years - PASS
- Dividend Record - currently pays a dividend - PASS
- Earnings growth - EPSmg greater than 5 years ago - PASS
|Value Based on 3% Growth||$23.62|
|Value Based on 0% Growth||$13.84|
|Market Implied Growth Rate||2.46%|
|Net Current Asset Value (NCAV)||$3.92|
Balance Sheet - 10/31/2013
Earnings Per Share
Earnings Per Share - ModernGraham
CSCO Dividend data by YCharts
Cisco Systems, Inc. looks very good for both the Defensive Investor and the Enterprising Investor, and has even improved upon the state we found the company in when it was last reviewed in November 2013. The company passes all of the requirements of the Defensive Investor except for the dividend history, as the company only recently began paying a dividend. In addition, all five of the requirements of the Enterprising Investor are satisfied. As a result, value investors following the ModernGraham approach should feel comfortable proceeding with further research to determine whether Cisco is right for their individual portfolio. One recommended research technique would be to compare Cisco to competitors such as by reviewing the ModernGraham valuation of Microsoft (MSFT) and the ModernGraham valuation of Hewlett-Packard Co. (HPQ).
From a valuation perspective, the company has grown EPSmg (normalized earnings) from $1.11 in 2009 to an estimated $1.63 for 2013. This level of growth is very solid, and outpaces the market's implied growth rate of 2.46%. The ModernGraham valuation model returns an intrinsic value that surpasses the market's price, demonstrating that the company seems to be undervalued at the present time.
The next part of the analysis is up to individual investors, and requires discussion of the company's prospects. What do you think? What value would you put on Cisco Systems, Inc.? Where do you see the company going in the future? Is there a company you like better?
Disclosure: The author did not hold a position in Cisco Systems, Inc. (CSCO) or any of the other companies listed in this article at the time of publication and had no intention of changing that position within the next 72 hours.